United Kingdom

Derisking - the escalating value of offshore projects

With the re-sale value of offshore wind power projects rocketing once they have been taken through the high risk early stages of development, consents and contracting, the potential rewards for the project developer are huge.

Three British offshore project sales in 2008 demonstrate the increase in value as development progresses, says Joel Staadecker, CEO of independent developer SeaEnergy Renewables.

He points out that developer Fluor sold its 50% stake in the post-consent 504 MW Greater Gabbard project off Suffolk in the east of England to its joint venture partner SSE for £40 million, including development costs, in May 2008 — a value of £157,000/MW to be installed.

At financial close in November that year when all the contracting was completed, SSE re-sold the 50% project share to RWE for £143 million, or £567,000/MW.

Meantime, Vattenfall had bought the 150 MW Ormonde project in the north Irish Sea just prior to financial close for £340,000/MW.

"These are real world examples which underpin [SeaEnergy’s] strategy to acquire greenfield sites in a limited universe of opportunity and take them through development," Staadecker told participants at a recent conference in London.

SeaEnergy was formed in 2008 around the team that helped develop an experimental deepwater project off the east coast of Scotland using two Repower 5 MW turbines and known as Beatrice. That project benefitted from Sea Energy’s offshore oil and gas expertise.

The company is one of only two developers in the UK offshore wind sector that are independent of the electric power industry, the other being Mainstream Renewable Power. SeaEnergy’s strategy is to team up with strong joint venture partners and the company is involved—mostly through minority stakes—with three projects off the east coast of Scotland totalling over 3 GW and a 600 MW project off Taiwan.

At its British sites, the company calculates wind project costs to be around £2.8 million for each installed megawatt of capacity, assuming 30% equity, 70% debt financing and an 8% interest rate.

Staadecker says the modelling is based on a sales price for the electricity that includes a premium in the form of Renewables Obligation Certificates (ROCs).

Each MWh of offshore wind generation in Britain is awarded 1.5 ROCs under renewables legislation. These certificates are sold to Britain’s electricity retailers, which are obliged to assemble a specified proportion of ROCs to meet the requirements of the Renewables Obligation law.

The system is expected to be extended to the third round of offshore wind farm leasing by Britain’s Crown Estate, known as Round 3.

"The conventional wisdom is that by the time we get to deployment of Round 3, the two ROC regimes will be extended, increasing revenue enhancement by about 33% and that all drops to the bottom line," says Staadecker.

Raising the development capital to get its share of the projects off the ground, however, has proved to be an insurmountable hurdle for SeaEnergy in the recent financial climate.

Staadecker notes that the global meltdown in the financial markets came just when the new business was trying to raise £24 million of private equity to fund development of its portfolio.

"We are now in a very risk averse environment. And the first thing that goes when risk aversion gets rampant is long-term capital investment," he says.

"There is just no appetite for a development company that is four to five years from liquidity."

SeaEnergy’s parent company, SeaEnergy PLC, has thrown in the towel and intends to divest its wind project development arm.

"We built a portfolio of great value but we can’t support the development cycle and need to transfer to the hands of a stronger sponsor.

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